TOPICS > Economy

How American companies change their address to avoid corporate taxes

August 26, 2014 at 6:24 PM EST
In the past three years, 22 American companies have relocated outside U.S. borders, usually through mergers with or purchases of a foreign company. That move, known as a tax inversion, means corporations are no longer subject to American corporate taxes. Jeffrey Brown learns more about the strategy and its effect on the economy from Roberton Williams of the Tax Policy Center.
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GWEN IFILL: Now, when is an American company not an American company?

Jeffrey Brown has our look at a growing controversy over corporate taxes.

JEFFREY BROWN: In recent years, a number of American companies, as many as 22 since 2011, have relocated outside U.S. borders, usually through mergers with or purchases of a foreign company. One impact of changing their business addresses: They’re no longer subject to U.S. corporate taxes. It’s a process commonly known as a tax inversion.

And Burger King appears to be the latest example. Today, it announced plans to pay some $11 billion for the Canadian restaurant chain Tim Hortons. Burger King will effectively become a Canadian company for tax purposes, though the company denies that was the motive for the move.

Here to tell us about all this is economist Roberton Williams, senior fellow at the nonpartisan Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

And welcome to you.

A tax inversion, it’s a phrase that maybe only an economist could like, right, or love. What exactly is it and are we actually seeing more of them?

ROBERTON WILLIAMS, Tax Policy Center: An inversion occurs when an American company merges with a foreign company and becomes the foreign company. That’s the important part. You have to become a foreign entity to avoid U.S. corporate taxes.

JEFFREY BROWN: And are we seeing more of them, in fact?

ROBERTON WILLIAMS: We are seeing more of them, for a couple of reasons.

One, people are seeing very high corporate tax rates and trying to avoid that. And, secondly, it appears that Congress is thinking about ways of stopping inversions. People are trying to get in ahead of that kind of change, make the inversion now, so you can take advantage of it before the door closes.

JEFFREY BROWN: I see, so they’re taking preemptive action in some cases.

ROBERTON WILLIAMS: Exactly.

JEFFREY BROWN: Now, as I said, Burger King says this is not why they did it. What do companies say about the tax structure, about why they might want to look — become foreign companies for tax purposes?

ROBERTON WILLIAMS: They’re not going to use taxes as the excuse for merging. That doesn’t sell well to the American public. It doesn’t sell well to their stockholders.

What they sell it as is an advantageous melding of two different kinds of activities. In the case of Burger King, they’re saying, we’re getting the breakfast activities of the Tim Hortons plant. So we’re bringing things together and making a more efficient, larger company that will bring benefits to the stockholders.

JEFFREY BROWN: And — yes, go ahead.

ROBERTON WILLIAMS: The tax savings are just an added benefit, they say.

JEFFREY BROWN: They say.

But what — how does the U.S. corporate tax structure compare to others?  I mean, what is the argument for that kind of move?

ROBERTON WILLIAMS: The United States taxes corporations differently than most other developed countries.

We tax corporations based on all the profits they make worldwide, as opposed to the profits they make at home. Most companies — most countries used a territorial system. You tax on the business that goes on in your own country. That’s a very different thing.

For us, we also have the very highest tax rate. Our tax rate is in excess of 35 percent, higher than any other developed country in the world. Now, we have a lot of tax breaks that bring the rates down, so the effective tax rates companies pay can be very low, depending on whether you can take advantage of those tax preferences, the tax loopholes, if you will.

The other big issue facing corporations is, if you earn money overseas, you don’t pay U.S. corporation — corporate taxes on that until you bring those moneys home, until you repatriate those moneys. Estimates are, there’s about $2 trillion of American companies’ profits sitting overseas because companies don’t want to bring them home and pay Americans taxes on them.

JEFFREY BROWN: Really?

ROBERTON WILLIAMS: They’re hoping for a tax holiday, a lower rate or a zero rate to bring those moneys home. And while they’re waiting for that to happen, they’re doing what would look otherwise like very silly things.

JEFFREY BROWN: Yes.

ROBERTON WILLIAMS: For example, Apple has billions of dollars of profit sitting overseas, yet they borrowed $30 billion earlier this year at home.

Why borrow money at home when you have got the money sitting overseas?

JEFFREY BROWN: You pay taxes.

ROBERTON WILLIAMS: Exactly. You don’t want to pay money on the taxes.

And you can deduct the interest you pay at home, so you’re doing OK on the home tax side.

JEFFREY BROWN: Well, so for the critics of the companies and for many people looking at this just — there as an example, where it looks inefficient, it looks unpatriotic. These are unpatriotic corporate citizens.

ROBERTON WILLIAMS: Well, the president certainly looked at it that way, and a number of congressmen have claimed, this is not a fair way to do it. On the other hand, as Judge Learned Hand said in the Supreme Court years ago, there’s nothing wrong with trying to minimize your tax bill. You and I do it, I hope.

JEFFREY BROWN: But you mentioned the president. He said — he sort of called out the companies.

ROBERTON WILLIAMS: Yes.

JEFFREY BROWN: He also, though, said he didn’t know how much authority — he didn’t think he would have that much authority to take action.

Where does that stand in terms of what the president or Congress might do?

ROBERTON WILLIAMS: Treasury is looking to see if there are ways they can close down some of the benefits for inverting. One of the things companies that invert do is loan money from the foreign company to the American part of the company.

The Americans pay interest to the foreign part of the company. That interest is deductible against the American profits and reduces the taxes paid by the corporation in the United States, and the interest is not taxable in other countries. So it’s a win-win situation on the tax side.

This is a way of not only getting out from under the corporate tax for your moneys earned outside the United States, but minimizing the tax you pay on profits made inside the United States.

JEFFREY BROWN: I know you’re not a political scientist. I don’t want to make you be, but you watch this. I mean, where do you see the kind of sentiment and politics of calls for change?

I mean, even today with Burger King, this is a very prominent company, right, with a name brand. I see calls for boycotts. So I wonder, how much public sentiment do you see out there that might be pushing the president and Congress to take some action that would stop these kinds of moves?

ROBERTON WILLIAMS: I don’t really know how far that is going to go. People will call for the boycotts, but whether they will actually give up their Burger King hamburgers or their Tim Hortons donuts in the morning, I don’t know.

What I do know is, we need the revenues. We’re running large deficits still. And whatever things that are using up those revenues are things not good for the U.S. Treasury. The Treasury will look for as many ways as they can to stop this. Whether it will be successful or whether Congress will step in a good question.

JEFFREY BROWN: All right, Roberton Williams of the Tax Policy Center, thanks so much.

ROBERTON WILLIAMS: You’re quite welcome.